President of NASD member firm and its trader manipulated the market for securities underwritten by firm, and published non-bona fide bids for those securities. In addition, president was responsible for firm's violation of its restriction agreement with the NASD, and refused to submit to an NASD investigative interview. Held, association's findings of violation and the sanctions it imposed sustained.

Michael J. Markowski, who was chairman, chief executive officer, and majority shareholder of Global America, Inc. ("Global" or "the Firm"), a former member of the National Association of Securities Dealers, Inc. ("NASD"), and Joseph F. Riccio, who was Global's trader, appeal from NASD disciplinary action. The NASD found that applicants violated Section 10(b)
of the Securities Exchange Act of 1934,1 Rule 10b-5 thereunder,2 and NASD Conduct Rules 2110 and 21203 by manipulating the market for securities of Mountaintop Corporation. The NASD also found that applicants violated Conduct Rules 2110, 2120, and 33104 by publishing non-bona fide bid quotations for Mountaintop; that Markowski violated Conduct Rule 2110 by failing to comply with a restriction agreement between the Firm and the NASD; and that Markowski violated Conduct Rule 2110 and Procedural Rule 82105 by refusing to submit to an investigative interview requested by the NASD's staff.

Markowski and Riccio were censured and barred in all capacities from association with any NASD member. In addition, Markowski was fined $300,000, and Riccio $250,000.6 We base our findings on an independent review of the record.

II.

In 1990, Global underwrote, on a firm commitment basis, an initial public offering ("IPO") of Mountaintop securities. Mountaintop was described in the prospectus as a development stage company formed to market Alaskan vodka. For the year ended December 31, 1989, the company suffered a net loss of $545,873, and it had a year-end working capital deficiency of $175,901. Unaudited figures for the first three months of 1990 showed additional losses and a larger deficiency. According to applicants, Mountaintop was a high-risk company in the formative stage "seeking to establish [its] Wall Street identity."

The Mountaintop offering, on June 29, 1990, comprised 1,200,000 units at a price of $3.50 per unit. Each unit consisted of two shares of common stock and two Class A warrants. Each Class A warrant entitled the holder to purchase one share of common stock and one Class B warrant for $1.875.7 All of the offering was sold on June 29, almost entirely to customers of Global. Aftermarket trading began that same day, and Global became the primary market maker.

It is clear that Global dominated and controlled the market for Mountaintop securities. Not only was virtually the entire offering sold to Global's customers but, from June 29, 1990 through January 15, 1991 (when Global ceased operations due to a net capital deficiency), the Firm was far and away the largest purchaser and seller of Mountaintop securities.8 For most of the relevant period, the Firm was either the exclusive high bidder for those securities or shared the high bid. Global withdrew as a market maker before the opening of business on January 16, 1991. On that day, the inside bid for Mountaintop units dropped 75%, the inside bid for Mountaintop common dropped 64%, and the inside bid for Mountaintop Class A warrants dropped 78%.

A promotional brochure issued by Global sheds light on the actions applicants took in the Mountaintop aftermarket. The brochure touts Global as "a full-service investment banker" with a program for the "support of emerging growth companies," for the benefit of investors, "that goes wellbeyond the traditional underwriting process." (emphasis in original). As amplified by Gary Boccio, Global's compliance director, the philosophy of the Firm and Markowski was as follows: "You [the investor] buy these stocks for [the] long term. We will support those companies and then your net worth will increase." The record before us shows that, until the Firm collapsed, applicants did support Mountaintop. Their support took two forms; (1) they maintained high bid prices for Mountaintop securities, and (2) absorbed all unwanted securities into inventory, thereby preventing sales from depressing market prices.

James Shanley, Global's chief operating officer, noted that all of Global's IPOs (including Mountaintop) were for start-up companies with no proven product. According to Shanley, Mountaintop securities opened too high and remained at high levels only because Global supported their prices. Shanley stated that, as 1990 went on, Global was "trying to buy all the [IPO securities that were offered to it, thereby] supporting the stock." He testified that, although he warned Markowski that trying to support a stock was almost an impossibility, "anything that came at us we bought."

Shanley gave a similar warning to Riccio, telling him that Global had to start lowering its bids, but Riccio refused to do so. Similarly, Boccio advised Markowski to start selling Global's growing inventories to other broker-dealers. However, Markowski replied that "he didn't want to show . . . any weakness in the stocks." According to figures introduced into evidence by the NASD, Global's sales to other dealers of Mountaintop units, common stock and Class A warrants amounted to less than 5% of its total sales of each of these securities.9 It is clear that most of Global's Mountaintop sales were made to retail customers, and only a relatively small number to other dealers.

Although Riccio was technically under the supervision of Shanley, he in fact reported directly and exclusively to Markowski. Markowski and Riccio were constantly in touch on all matters affecting Riccio's trading operations, including the size of Global's inventories. Riccio admitted that it was Global's policy to carry large inventory positions in Mountaintop and other IPO securities; that Global was "high bid a lot of the time;" and that the Firm was a "buyer." Riccio further conceded that one of the reasons he did not drop his bids was fear of customer complaints. When asked why Global was not selling its IPO inventories to other dealers, Riccio replied that Global was following its basic philosophy of financing IPO companies. He stated that he "understood what [his] job was," and never questioned Markowski's approach of trying to support the companies' securities. Markowski himself conceded that, in the latter part of 1990, although the Firm was running out of money, it was still "buying every share that came at it, trying to support the price of the stock." Ultimately, applicants' actions led to Global's net capital deficiency and the Firm's demise.

The price leadership in a security that results from almost exclusive control over the source of supply empowers an underwriter to set prices arbitrarily. We have previously pointed out that, "if that power is abused, the result is a manipulation."10 Applicants abused Global's control position with respect to Mountaintop. To avoid a manipulation, a controlling dealer's pricing must reflect genuine market conditions. "A dealer may not exploit his ability both to restrict supply in the marketplace (by buying investors' unwanted shares) and charge an arbitrarily high price."11 That is precisely what Global did here. Global's pricing did not reflect genuine demand, but merely applicants' desire to maintain high price levels, a desire further evidenced by Global's eagerness to purchase every Mountaintop security offered to it despite the Firm's deteriorating financial condition.

Pointing out that Global ultimately lost money on its Mountaintop trading, applicants argue that there is no evidence that they acted with scienter. We do not agree. While profit is the normal goal of manipulators, their actions are not rendered innocent simply because they fail to achieve the desired result.12 Applicants staked Global's reputation on being an "investment banker" for the companies whose shares it underwrote. Customers were told that all they needed to do was "buy and hold" those securities and, with Global's support, they would be suitably rewarded. Rather than destroy their customers' confidence, applicants chose to keep Mountaintop prices high by manipulating the market for Mountaintop securities. We conclude that Markowski and Riccio acted with the requisite scienter. We accordingly sustain the NASD's findings of violation.13

III.

As noted above, the NASD found that applicants violated its rules by publishing non-bona fide bids for Mountaintop securities. Applicants argue that Global's bids were real, not illusory, and resulted in substantial purchases and sales. However, an NASD Board of Governors rule interpretation (IM-3310) provides in relevant part as follows:

"[I]t would be inconsistent with the [pertinent rules] for a member . . . to publish . . . any quotation for any security without having reasonable cause to believe that such quotation . . . is not published . . . for any fraudulent, deceptive or manipulative purpose."

We have found that the bids for Mountaintop were published with the manipulative purpose of keeping Mountaintop prices at an artificially high level. We accordingly sustain the NASD's findings of violation.

IV.

Global was admitted to NASD membership subject to certain restrictions placed on it by the NASD. A restriction agreement, dated May 19, 1989, provided, among other things, that the Firm's total inventory positions must not exceed 200% of its excess net capital. The agreement further provided that its terms could not be changed without the NASD's prior written consent.

In his answer to the NASD's complaint, Markowski admitted that the restriction agreement was violated from September 1, 1990 through January 15, 1991 unless the terms of the original agreement had been altered, as to which Markowski professed ignorance. In fact, the record shows that Markowski signed four amended restriction agreements. All of those amendments retained the above-noted 200% limitation, and the record does not show that any change was ever made in that requirement.

In his briefs on appeal, Markowski concedes that the restriction agreement and its various amendments "may have been violated" and, in Global's closing days, "probably violated." He further admits that, as Global's owner and chief executive officer, he was "ultimately responsible." However, he argues that Shanley had the primary responsibility for monitoring the Firm's compliance with the agreement.

The chief executive officer of a brokerage firm is responsible for compliance with all of the requirements imposed on his firm "unless and until he reasonably delegates particular functions to another person in the firm and neither knows nor has reason to know" that a problem has arisen.14 Assuming that "monitoring responsibility" was delegated to Shanley, Markowski was clearly on notice that the Firm was violating its restriction agreement. Shanley testified that Global probably violated the agreement during the course of every month for the last year of the Firm's existence, and that he notified Markowski, only to have the problem recur.

On December 11, 1990, Boccio and Stuart Polansky, Global's chief financial officer, wrote a memorandum to Markowski with respect to Global's "immediate regulatory and financial concerns." The memorandum stated: "You are aware that we are violating our restriction letter for the fourth straight month." On December 12, 1990, Boccio wrote to Markowski expressing his increasing concern regarding the lack of executive support for actions necessary to address "significant compliance issues" facing the Firm, all of which Boccio stated he had raised previously. Among the issues listed was "the daily violation of our NASD restriction letter regarding position limitations."

It is clear the Markowski was aware that his Firm was violating its restriction agreement with the NASD. However, he failed to take the necessary action both to correct the problem as soon as it was brought to his attention and to prevent any recurrence. We accordingly sustain the NASD's finding of violation.

V.

On February 25, 1992, a staff attorney in the NASD's Anti-Fraud Department wrote to Markowski requesting an on-the-record interview on March 5 in connection with the Department's investigation of Global's trading activity. The letter warned Markowski that failure to appear might be grounds for disciplinary action. Counsel for Markowski responded on March 2, stating that Markowski could not appear on March 5 because he had already made arrangements to attend a seminar in California. In a March 3 telephone conversation with Markowski's counsel, the NASD attorney agreed to postpone Markowski's interview until April 16, based on counsel's assurances that he and Markowski would be present and ready to proceed on that date.

On April 13, 1992, Markowski's counsel wrote to the NASD attorney advising him of counsel's conclusion that Markowski "should not testify at this time." Among the reasons cited for this refusal were a competing investigation by the Commission and Markowski's belief that the NASD's investigation was "nothing more than a personal vendetta." In June, for reasons not disclosed in the record, Markowski's counsel agreed to the interview and it was finally held on June 29.

Markowski argues that the delays he requested were reasonable; that the NASD was not prejudiced thereby; that there was no urgency since Global was no longer in business; and that he ultimately testified in accordance with the NASD's request. We do not consider that these responses justify Markowski's conduct. Markowski and his counsel requested and received a lengthy postponement. Counsel then wrote to the NASD indicating that his client would not testify. The NASD has the right to request information and require cooperation from its members and persons associated with them. Markowski's refusal to testify was in direct conflict with his obligation to do so. His later change of mind does not excuse his action. Unwarranted delay erodes the NASD's ability to carry out its regulatory responsibilities.15 The determination of when it is appropriate for an investigation to proceed is a matter for the NASD to decide, not the respondent. We accordingly sustain the NASD's findings of violation.16

VI.

Applicants argue that, if the charges against them are not dismissed, their sanctions should be limited to short suspensions. We do not agree. Our review of NASD sanctions is governed by Section 19(e)(2) of the Exchange Act, which requires us to determine whether the sanctions are excessive or oppressive or impose an unnecessary burden on competition.17 Here applicants engaged in egregious misconduct. As we have previously emphasized:

Manipulation strikes at the heart of the pricing process on which all investors rely. It attacks the very foundation and integrity of the free market system. Thus it runs counter to the basic objectives of the securities laws.18

We further note that this is the second time that Markowski has been disciplined for refusing to cooperate with an NASD investigation.19 With due regard for the public interest, we are unable to conclude that the sanctions imposed by the NASD are excessive or oppressive, or unduly burden competition.

Footnotes

3 Conduct Rule 2110 requires the observance of high standards of commercial honor and just and equitable principles of trade. Conduct Rule 2120 proscribes fraud in securities transactions.

4 Conduct Rule 3310 prohibits the dissemination of any quotation that a member does not believe is bona fide. An NASD Board of Governors interpretation of the pertinent rules (IM-3310) prohibits the dissemination of quotations "for any fraudulent, deceptive, or manipulative purpose."

5 Procedural Rule 8210 requires persons associated with member firms to report orally with respect to any matter involved in an NASD investigation.

7 Each Class B warrant entitled the holder to purchase one share of Mountaintop common for $2.75. The Class B warrants are not at issue in this proceeding.

8 NASD figures comparing Global's purchases and sales of Mountaintop securities with those of other brokers show that, during the relevant period, Global accounted for 82.4% of total unit purchase volume, 68.4% of total common stock purchase volume, and 60.6% of total warrant purchase volume. The brokers with the next highest percentages accounted for, respectively, only 6.3%, 9.1%, and 7.8% of that volume. On the sales side, Global accounted for 53.6% of total unit sales volume, 69.8% of total common stock sales volume, and 54.1% of total warrant sales volume. The brokers with the next highest percentages accounted for, respectively, 12.5%, 6.3%, and 17.3% of that volume. While applicants question whether these figures are wholly accurate, it is clear that Global dominated the market for Mountaintop securities.

9 Although applicants question the NASD's figures in this regard, the testimony clearly evidences Global's reluctance to sell Mountaintop securities to other dealers. Thus, although we need not rely on the NASD's figures, we consider them to be substantially accurate.

13 In their briefs on appeal, applicants point to discrepancies between certain numerical data on which the NASD relied and data from Global's records. Although requested to do so, the NASD failed to clarify the matter. Accordingly, we have not relied on the conflicting data in making our findings of manipulation.

16 Markowski points to a recent unpublished court decision (Fiero v. SEC (2d Cir., January 20, 1999)) which questioned the authority of the NASD's Market Surveillance Committee ("MSC") to request an investigative interview. That case is inapposite. As noted above, the request to interview Markowski came from a staff member of the NASD's Anti-Fraud Department, acting as agent of the NASD's Board of Governors.

Markowski further contends that the MSC, which initially heard and considered the evidence, was prejudiced against him. We find no evidence of prejudice. We note, moreover, that the MSC's decision was accorded de novo review by both the NASD's National Adjudicatory Council and the Commission.

20 We have considered all of the parties' contentions. We reject or sustain them to the extent that they are inconsistent or in accord with the views expressed herein.

UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934
Rel. No. 43259 / September 7, 2000

Admin. Proc. File No. 3-9671

In the Matter of the Application of

MICHAEL J. MARKOWSKI
1521 Alton Road #233
Miami Beach, Florida 33139

and

JOSEPH F. RICCIO
2654 Oleander Court
Palm Harbor, Florida 34684

For Review of Disciplinary Action Taken by the

NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION

On the basis of the Commission's opinion issued this day, it is

ORDERED that the disciplinary action taken by the National Association of Securities Dealers, Inc. against Michael J. Markowski and Joseph F. Riccio, and the Association's assessment of costs, be, and they hereby are, sustained.